Chapter 5
Channels
The channel pattern is one of the easiest to identify, although it is not very common. It consists of a pair of parallel trendlines that confine a stock's price for a meaningful length of time. One of the interesting things about this pattern is that it can serve three different purposes: It can provide a series of buying and shorting opportunities as it oscillates within the pattern; it can serve as a buy signal when broken to the upside; and it can serve as a sell signal (or short signal) when broken to the downside.
The reason channels are fairly rare is because a stock's uptrend or downtrend is usually too random or biased in a particular direction to create a clean trend. Ideally, the price movement between these two trendlines will represent a sine wave, with the price rallying up to resistance, stalling, and then selling off to support. The more times it does this, the more useful it is as a tool for swing trade opportunities, and the more potent it is when it finally does break in one direction or another, as it is bound to do eventually.
DEFINITION OF THE PATTERN
A channel is made up of two trendlines that are more or less parallel. They may be ascending or descending, and if you use a high-end charting program such as ProphetCharts, you can make use of the Channel tool to establish those boundaries with just three data points. Most channel objects can also show the median line (that is, a third parallel line between the other two) and also lines for ...
